U.S.-EU Trade Talks Risk Damaging Turkey Ties

U.S. President Barack Obama travels to Europe next month to start formal negotiations on a trading bloc that would dwarf any the world has seen. He should look for ways to integrate Turkey into this new order.

Trade between the U.S. and the European Union still accounts for a third of everything the world imports and exports, at $645 billion last year. Foreign direct investment between the U.S. and the EU is more than $3.7 trillion. So in the depths of a global economic crisis, no wonder people are excited about the potential boost to growth this would provide.

Yet before thrashing out the details of the new Transatlantic Trade and Investment Partnership, Obama and his EU counterparts should consider the tough situation it would create for other close allies and trading partners, who won’t be at the bargaining table.

Turkey is one of the most important of these. How it fits into U.S.-EU trade talks will be high on Prime Minister Recep Tayyip Erdogan’s agenda when he meets Obama in Washington on May 16. His country has a vital strategic partnership with the U.S. and a customs union with the EU. Yet it won’t have a say in the trans-Atlantic trade deal.

Unfair Trade

Deputy Prime Minister Ali Babacan estimates that Turkey may lose 2.5 percent of gross domestic product, or $20 billion, a year if it is left out. According to Turkish media, Erdogan spelled out Turkish frustrations about this unfair trade situation in a letter to Obama in March.

Obama should respond to these justified concerns. Excluding the world’s 17th-largest economy from a U.S.-EU free-trade area would be a missed opportunity and might endanger the “model partnership” that Obama has worked to build with Turkey.

Turkey formed its customs union with the EU in 1995, with a view to eventually joining the bloc. The terms of this union stipulate that the government in Ankara can’t pursue a bilateral free-trade agreement with any country until the EU has established one already. By contrast, when the EU signs a trade deal with a third country, it gives access to Turkey’s market without Turkish consent.

The result is that Turkey’s trade policy has been shadowing that of the EU, following on the heels of the European Commission’s trade negotiators as they moved from South Korea, to Japan, to India. In the case of a trade pact as ambitious as the one Obama will be discussing with the EU, however, Turkey is put at a severe disadvantage.

Turkey will have to negotiate its own agreement with the U.S., or else find itself lowering tariffs on imports from the U.S. with nothing in return. The U.S., meanwhile, would have little economic incentive to sign a separate deal with Turkey once a trade pact with the EU is in place, because it would already get the benefits of such an agreement. This has been the result when the EU signed trade deals with several other countries.

There are steps the Turkish government could take to counter this problem, such as levying additional taxes on U.S. products. Yet this isn’t a constructive tool. It would act as a red rag to Congress, whose support Turkey will need for any bilateral trade deal with the U.S.

Some Turkish officials have suggested revising, which could mean leaving, the EU customs union in order to give Turkey a freer hand in determining its trade relations with third countries. That route might aid Turkish trade in the short term, but it could also signal that Turkey has abandoned all hope of becoming a full EU member.

Political Implications

It’s an interesting question whether Erdogan’s ruling Justice and Development Party still wants to join the EU, and whether it might choose to use its exclusion from the trans-Atlantic trade talks as an excuse to pull back from further integration with the EU. If so, this would have serious political implications as Turkey seeks to diversify its economic relations more aggressively with countries such as Iran and Russia. Ending the EU accession process would also eliminate what has been a powerful force in strengthening Turkey’s democracy.

Integrating Turkey into the emerging trans-Atlantic trade order would require some imagination. An initial measure, as spelled out in a 2012 report for the Turkish Industrialists’ and Businessmen’s Association, better known as Tusiad, would be to revamp the current Bilateral Investment Treaty between the U.S. and Turkey, which is now outdated. A more comprehensive deal could increase transparency, encourage investment and strengthen the ties required to achieve Obama’s model partnership.

The U.S. and Europe could also explore creating a “Track Two” consultative role in their negotiations for third countries that are deeply integrated into the trans-Atlantic economy. This Track Two body should include not only Turkey, but also Canada and Mexico, both of which have expressed an interest in participating in negotiations. The aim would be to ensure that gains from liberalized trans-Atlantic trade and investment don’t come at the expense of other close U.S. partners.

Finally, the U.S. should explore the long-term economic and strategic value of a free-trade agreement with Turkey. At just $19 billion in 2012, trade between the two countries has a lot of room to increase. Turkey is the third fastest growing market for U.S. agricultural products, an American export priority. A conventional free-trade agreement based on mutual reduction of customs duties in most sectors could mirror trans-Atlantic talks and be implemented simultaneously.

As a member of the North Atlantic Treaty Organization and ally of the U.S., Turkey has grown dramatically in regional importance in recent years. Frustration at being shut out from the free-trade bargaining table could needlessly sour Turkey’s strategic relationship with the U.S., at a time when the Obama administration is trying to rely more on allies and scale back military involvement in the region.

Admittedly, in the midst of negotiating two huge free-trade agreements — one with the EU and one with East Asia — the administration may struggle to persuade Congress to support another deal, with Turkey. There’s much more at stake, however, than economics.

Cenk Sidar is managing director of Sidar Global Advisors. Tyson Barker is the Washington-based director of trans-Atlantic relations at the Bertelsmann Foundation, and is also a Truman Security Fellow. This post originally appeared in Bloomberg View.